If you decide to hire a domestic employee, such as a nanny, a care taker, a driver or someone to take care of your garden, you must be aware that the second you enter a contract with the person you are hiring, you undertake special responsibility, including payroll and tax-related issues, especially if the person you hire becomes your employee.  

Your domestic help is your employee if you have control not only over the tasks that your help is charged with, but also over the manner the tasks are carried out. This means that if you hire someone to carry out certain tasks around the house, but that person is self-employed and works with his or her own tools and carries out the task in question as part of the general services he or she offers to the public, the person in question is not your employee. In a similar logic, if the person you hire carries the tasks you need based on your instructions, using your tools, that person qualifies as your employee.

If your relationship with the domestic help complies with the above definition of employer-employee relationship, here are the payroll and tax issues you must handle:

• You must make sure the person you are hiring can legally work in the United States.
• You must find out if you are required to pay state taxes, which are different for each state.
• You must report the employment within 20 days of the hiring and register as an employer and obtain an employer identification number (EIN).
• You must withhold Medicare taxes, Social Security taxes and federal income taxes.
• Most states require you as an employee to pay worker’s compensation and disability insurance as well.
• You must pay unemployment insurance and report employee wage information on a quarterly basis.

More details are available on the IRS website. Bear in mind that every state has different laws regarding employment and you will need to comply with both federal and specific state laws.